By Brian Swint, Francois de Beaupuy and Edmund Andrews
EUROPEAN finance ministers failed to agree on steps to shore up the banking system hours after their countries' leaders pledged to do whatever was needed to restore confidence as the continent's stocks fell the most in two decades.
In early trading yesterday the Stoxx 600 index of European stocks fell 7.6 per cent to 241.6, the steepest fall since 1987. Europe's fall helped erase about $US2.5 trillion ($3.36 trillion) from global equities as investors disregarded the US Treasury plan to revive credit markets with a $US700 billion bank bail-out.
European stocks were hammered in trading on Monday night, the FTSE index of British stocks down 7.9 per cent, the DAX index of German stocks down 7.1 per cent, the CAC index of French stocks down 9 per cent, and the Russian sharemarket down 19.1 per cent. Finance ministers were to gather before a meeting in Luxembourg last night to address the crisis and discuss sharply increasing the level of deposit insurance across all 27 European Union member states.
But there seemed to be little support for suggestions that Europe create a US-style bank rescue fund at the monthly meeting of finance ministers in Luxembourg yesterday.
After taking a beating on Monday night, European sharemarkets opened up yesterday as Australia's bigger-than-expected interest-rate cut spurred speculation that central banks around the world would reduce borrowing costs to cushion their economies from the credit freeze.
The FTSE rose 2.6 per cent, the DAX was up 1.8 per cent and the CAC 40 rose 3.5 per cent in early trade. The Stoxx 600 rose 2.6 per cent in London as all 18 industry groups increased more than 1 per cent.
But Russian share trading remained suspended for a second day after a record 19 per cent plunge on Monday night.
Officials across Europe, mostly acting unilaterally, are rushing to rescue banks on the brink of collapse as the global credit squeeze bears down on the continent.
"As far as I can tell, everyone's going their own way," said Peter Dixon, an economist at Commerzbank AG in London. "They can give blanket guarantees. They're almost meaningless, because depositors weren't going to lose money anyway. But it does take heat out of the system."
Before yesterday's meeting, European Union leaders pledged to protect depositors from losing their savings to bolster confidence as share prices fell.
Austria moved to match Germany's decision on Sunday to guarantee deposits, and Spain pledged to follow suit if a single euro-zone policy is not found soon. Denmark said it would also guarantee loans that banks make to one another overnight as banks continue to recoil from doing business among themselves.
Iceland, one of the hardest-hit countries from the credit turmoil, fell deeper into crisis as the Government halted trading in all financial stocks after the banking sector neared collapse.
That European governments continue to plot their own course has not helped. Europe's big cross-border banks find themselves trying to conserve capital and are cutting back on lending to local businesses. In some cases even loans within the same bank have been held up trying to cross borders because different units enjoy varying degrees of state backing. These bottlenecks have altered the thinking of analysts who thought the region might escape the worst, and raised pressure on the European Central bank to cut interest rates - perhaps the only significant euro-zone tool to ease the credit crisis that has yet to be deployed.
"The fear in Europe is that a recession may be a protracted one," said Holger Schmieding, the chief economist for Europe at Bank of America.
"I hope we won't go there, but the mood is dark."
Bloomberg, The New York Times